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Dr Aleka Mandaraka – Sheppard Arbitrator

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1 New trends in piercing the corporate veil (conservative v liberal approaches) 3 December 2013
Dr Aleka Mandaraka – Sheppard Arbitrator LSLC – Maritime Business Forum

2 Under South Africa associated ship arrest
New trends in piercing the corporate veil (conservative v liberal approaches) Under English law Under USA Rule B attachment Under South Africa associated ship arrest Under Greek law SC case Under French law AMS - LSLC

3 English law The unyielding rock of corporate veil
Salomon v A Salomon (1897): a century old principle: Corporate Separate juristic personality Separate rights, responsibilities, and assets from shareholders Provides way of limiting liability encourages business development by non-interventionism NOT ALLOWED BY LAW TO PIERCE THE VEIL, EXCEPT IN SPECIAL CIRCUMSTANCES AMS - LSLC

4 How strong is the rock of Salomon?
Most advanced legal systems abide by the principle But no international uniformity When the law permits exception to the rule, the effect of piercing is drastic: disregard of corporate personality Depriving company or its controllers of advantages they would have obtained by company’s separate personality AMS - LSLC

5 questions examined by English courts:
Would piercing corporate veil be applicable: For interests of justice? To what impropriety of controllers? If there are other remedies in law? To hold controllers liable under corporate’s contract? AMS - LSLC

6 Lifting or Piercing veil
Lifting (ordering evidence to peep behind veil for certain legal purpose) is distinguished from piercing (ultimate result – sanction - remedy) See Coral Rose (1991) per Staughton LJ But these terms are confusingly used indiscriminately in many cases Now ‘Concealment’ cases are equated to lifting – not piercing: (per Lord Sumption – in Petrodel) court is looking behind the veil to discover true facts AMS - LSLC

7 Piercing veil – Historical Overview
1897 to 1966, HL could not overrule itself during this period Salomon rule applied faithfully Gilford Motor v Horne (1933) and Jones v Lipman (1962) had been considered (on their facts) classic cases for piercing In former, a solicitor set up a company to avoid a covenant by previous employers (injunction obtained to prevent him) In latter, Lipman set up a company to avoid a conveyance transaction and transferred land to company (specific performance granted) – equitable remedies AMS - LSLC

8 Piercing veil – Historical Overview
In 1969 Lord Denning MR – encouraged lifting of veil (Littlewoods Mail Order v IRC) and 1976 (DHN Food Distributors v Tower Hamlets) for interests of justice – basis: corporate structure one economic unity brought uncertainty to safety of corporations Interventionist years until early 1980s AMS - LSLC

9 Piercing veil – Historical Overview
In 1978 Lord Keith disapproved of the Denning decisions in Woolfson v Stratclyde Reaffirmed Salomon Stated (obiter): ‘appropriate to pierce corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts (meaning a deliberate dishonest purpose) Decision had strong and persuasive influence In Re Company (1985) CA allowed piercing for interest of justice: but corporate structure used by controller to divert assets to avoid liabilities AMS - LSLC

10 Piercing veil – Overview
In 1988 Lord Donaldson MR in Evpo Agnic crystallised legitimacy of one-ship companies (SA jurisdiction undermines it) In 1989 Adam v Cape CA: further support of non-intervention with corporate structures rejected piercing on basis of one economic unity and interest of justice may be one entity for economic purposes but not one unit for legal purposes Cape had used corporate form legitimately AMS - LSLC

11 Piercing veil – Overview
Freezing injunctions obtained e.g Kensington International v Congo (2005) against Vitol and controllers of company In Linsen v Humpuss (2011) evidence of abuse of corporate structure – good arguable case that purported sales of vessels to 3rd def were shams to render enforcement of judgment against 1st def more difficult But Flaux J discharged the freezing injunction – 3rd def not liable under underlying contract for chartered hire AMS - LSLC

12 Piercing veil – Overview
In family division judges followed less rigid approach: on basis of ‘what is just and necessary to protect families after divorce But Munby J in A v A said (2007): there is not one law of ‘sham’ in the Chancery division and another in the Family division – there is only one law of ‘sham’ to be applied by all courts AMS - LSLC

13 New trend-limitations? Petrodel v Prest (2013)
‘sham’ or ‘façade’ considered by Lord Sumption in Petrodel as begging too many questions Don’t give answer to what is relevant ‘wrongdoing’ by controllers AMS - LSLC

14 New trend – what impropriety?
Petrodel: If piercing the veil has any role to play, There must be both control by shareholder and impropriety The impropriety is in relation to deliberate evasion of existing and independent liabilities of the controller whose enforcement the controller deliberately frustrates by interposing the company’s personality No piercing of veil if there is another remedy in law – no justice imperative AMS - LSLC

15 New Trend – limitation - VTB Capital v Nutritek
Question: how far the scope of exception to Salomon be extended? Could controllers become parties to company’s contract? Burton J held in Gramsci v Stepanovs (2011):arguable case to pierce veil to permit an action against controllers under jurisdiction cl of contact Disapproved of by CA and indirectly overruled by SC in VTB Capital (2013): Held: no direct contractual right to jurisdiction AMS - LSLC

16 New trend – limitations to piercing veil
VTB Capital: no extension of scope of piercing veil to hold controllers contractually liable to claimant for debt of company Principle could not be invoked to create new liability Declined to pierce veil when there are other remedies available e.g. tort of deceit or equitable remedies Flaux J had held same in Lindsay v O’Loughnane (2010) and Warren J in Dadourian v Simms (2006) AMS - LSLC

17 New trend – limitations to piercing veil
Lord Neuberger in VTB Capital and in Petrodel: ‘piercing veil is a potentially valuable tool to undo wrongdoing in some cases, where there is no other remedy available’ (narrow rule) Lord Sumption in Petrodel: ‘the recognition of a limited power to pierce veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse’ (perhaps broader rule?) WHAT DOES IT MEAN? Over to Simon and Robert THANK YOU AMS - LSLC

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